Beware of M&A advisory firms with large up-front fees
It’s a lure that’s hard to resist, a free seminar and the promise of “premium buyers” ready to scoop up your business. However, if you’re serious about selling, be aware that some seminar merger and acquisition firms are not what they appear to be, nor are the services they provide. This article is meant to help business owners become aware of these firms’ deceptive practices.
In the next 10 to 15 years, many business owners will reach retirement. Some will transition their businesses to their children and/or existing managers. However, many business owners will find themselves without clear succession plans, either because their children are disinterested in the businesses or because their existing managers do not have the financial resources to complete the transactions. In these situations, business owners will likely sell to outside buyers.
Business owners may attempt to sell their businesses themselves or hire professional advisers to assist. Such advisers are often referred to as business brokers, merger and acquisition intermediaries or investment bankers – all terms used to describe the “dealmaker” who helps connect business buyers and sellers. While many advisers provide valuable resources, a handful of “seminar” firms employ deceptive practices to lure clients into engagements with steep up-front fees.
These so-called merger and acquisition firms regularly conduct free all-day seminars for business owners who want to learn more about selling their companies. Most attendees are small, private business owners with companies that generate $1 million to $25 million in annual revenue. During the seminar, attendees are enticed by how their businesses could be purchased by a large international companies, U.S. companies or private equity groups for extraordinary amounts of money. These seminars suggest that the fundamental principals of business valuation somehow do not apply with their "premium buyers."
So what's the catch? These firms will not sell a vast majority of the businesses they engage, let alone for the values suggested in the seminar. Rather, they make most of their money in up-front fees, typically $37,500 to $50,000, and of course it is clearly stated in their contracts that they make no representations or warranties that they can sell the business at all.
The originator of this deceptive seminar model was Irvine, California-based The Geneva Companies. However, their seminar program ended when Jeoffrey L. Robinson, attorney at Robinson, Calcagnie & Robinson (http://www.orangecountylaw.com/), led an unfair business practice class action against The Geneva Companies, in which he litigated a 45 million dollar recovery against the company. Unfortunately, other seminar companies are still out there making false promises, wasting business owners’ time and resources.
However, there is good news. There are many professional and reputable dealmakers across the country who work hard to sell businesses. They range from the sole practitioner brokers who focuse on smaller "mom and pop" businesses to larger investment banks that specialize in a particular industry. Many of these firms do charge modest up-front fees for performing a business valuation and/or initiation of a marketing campaign, but the difference is that a reputable firm earns most of their fee as a commission after successfully completing a sale.
So, how do you differentiate the good from the bad? Ask the firm what is their success record, how many engagements did they take last year and what percentage did they successfully sell? Ask for a list of references from past clients. Rely on your trusted advisers (attorneys, accountants and bankers) to recommend a firm to you.
Most importantly, remember that if what you are hearing sounds too good to be true, it probably is.
